Fitch Affirms Pittsburgh, PA's GOs at 'A'; Outlook Stable

Fitch Ratings affirms the 'A' rating for the city of Pittsburgh, PA's (the city) $545 million outstanding GO bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are general obligations of the city to which the full faith, credit and taxing power of the city are pledged.

KEY RATING DRIVERS

INCREASED FINANCIAL FLEXIBILITY: Growth in fund balance levels has improved the city's financial flexibility, allowing it to fund some capital projects from operations. Financial performance is aided by ongoing state oversight.

PENDING IMPROVEMENT TO WEAK DEBT PROFILE: Debt service accounts for an above-average percentage of spending. Debt levels are well down from past highs and annual debt service is currently scheduled to decline substantially beginning in 2018, providing flexibility to address other spending needs including deferred capital projects.

DIVERSE BASE ANCHORS ECONOMY: The strong presence of health care, education and financial services continue to anchor the city's stable economy.

PENSION PLAN APPROVED: A large cash infusion and the dedication of a revenue stream has improved pension funding levels and allowed the system to avoid state takeover. The funded ratio is still below average.

REASSESSMENT IMPLEMENTED: A large reassessment was completed with limited impact on the city's finances, removing what had been a looming uncertainty.

RATING SENSITIVITIES:

CONTINUED FINANCIAL FLEXIBILITY: Adherence to the city's financial forecast could lead to positive rating action.

DEBT LEVELS AND PENSION FUNDING: Fitch expects the city to continue its plans to reduce debt levels in the next five years while adequately addressing its capital needs and to reduce pension liabilities.

CREDIT PROFILE

Pittsburgh serves as the anchor of the western Pennsylvania economy. The city's population of 306,211 is down from its high of 676,806 in 1950, though it has stabilized somewhat in recent years.

ECONOMY AIDED BY PRESENCE OF HEALTH CARE, EDUCATION AND FINANCE

The strong presence of health care, education and financial services anchor Pittsburgh's economy and have offset the decline of the manufacturing sector, the city's traditional economic base, over the past few decades. The University of Pittsburgh Medical Center (UPMC), the city's top employer, is one of the region's largest medical facilities. The city is also home to the West Penn Allegheny Health System, the University of Pittsburgh and PNC Financial Services. The economy has also recent benefitted from the development of the Marcellus Shale in surrounding areas.

The city has experienced three consecutive years of employment growth. The 6.5% unemployment rate as of October 2013 is lower than that of the state (6.9%) and nation (7.0%). Wealth levels are below average, though educational attainment levels exceed national averages.

The tax base remained relatively stable because 2002 was used as the base year for assessments through 2012. The millage rate was not changed during this time. The PA Supreme Court ruled in April 2009 that the base year method for property valuation as applied by Allegheny County violates the state constitution.

After some delays, a reassessment was implemented for 2013. The tax base increased from $13.6 billion to $18.6 billion after the resolution of errors and appeals. The millage was reduced in an attempt to make the reassessment revenue neutral. However, in setting the millage rate, the city underestimated the extent of appeals, so property tax revenue came in approximately 5% below budget in 2013. The 2014 budget has been adjusted to reflect the reduced tax base.

FINANCIAL OPERATIONS AIDED BY FISCAL OVERSIGHT

Since December 2003, Pittsburgh has operated as a 'distressed municipality' under the state's Municipalities Financial Recovery Act (Act 47). Among its other roles, Act 47 strongly influences the city's collective bargaining agreements. As Pittsburgh's finances have improved, there has been talk by the Act 47 coordinator and members of city government of removing the city from Act 47, but the city's new mayor is actively lobbying the state to remain in the program, with the ultimate decision made by the state. The majority of the city's labor contracts are settled through 2014.

The state created additional fiscal oversight of the city under the Intergovernmental Cooperation Authority Act for Cities of the Second Class (Act 11) (known as ICA) in 2004. The ICA, which was intended to help the city recover from its financial crisis in 2003 and bring it long-term fiscal health, is granted considerable financial control including approval of the city's annual budget and multi-year financial plan.

The city's general fund benefits from a relatively diverse revenue stream. In addition to property taxes the city collects taxes on earned income, parking, amusements, deed transfers, local services (taxed if employed in city), facility usage (sports stadium and arena users) and payroll prep. The city also is guaranteed at least $10 million annually in gaming revenues from the state. The city's relatively stable economy has led to little variance in key revenue sources.

The city had two years of large general fund surpluses in 2011 and 2012 of $20.4 million (4.3% of spending) and $22.8 million, respectively. These results brought the city's unrestricted fund balance to $84.4 million, or a strong 18.4% of expenditures. The surpluses were driven by savings on salaries, a one-time state contribution towards pensions in 2011, and positive variances in several key revenue sources.

The city expects to have approximately balanced operations for 2013. An increase of about 11% in earned income tax revenue will be offset by an increase in salaries from negotiated contracts and a decrease in real estate tax revenues from the reassessment.

The city's 2014 operating budget is balanced with a $24 million deficit resulting from $25 million of spending on capital projects. Moderate increases are projected to key revenue sources. The deficit would bring the city's unrestricted fund balance down to approximately 13% of expenditures. The city's five-year plan shows small surpluses from 2015-2018. The city has a history of conservative budgeting. However, while revenue assumptions appear reasonable, projected expenditures could be pressured by greater than expected wage increases and increased capital costs. Fitch believes that the achievement of projected targets could improve prospects for rating improvement over time.

DEBT LEVELS RAPIDLY DECLINING

Overall debt levels are moderate at $3,849 per capita and 3.8% of market value. This incorporates a favorable decline in direct debt from $824 million in 2006 to $490 million in 2014. Annual debt service is a high $88 million (18% of general fund expenditures) through 2017. It drops to $72 million in 2018, then to $39 million from 2019 where it remains for the current amortization period. Pay-out is very rapid with 87% of principal being retired within ten years. The city has several manageable debt issues planned beginning in 2015 which are projected to cover most of its capital needs, and debt service including the new issues will remain below the city's 12% policy level.

PENSIONS CONTINUE TO POSE RISK

The city maintains three single-employer defined benefit pension plans for non-uniformed employees, police, and fire, respectively. As of January 2009, the plans had a very low aggregate funding level of 34.3%, assuming an 8% investment return. Using Fitch's more conservative 7% discount rate, the funded level was estimated at 30.9%. The Commonwealth of Pennsylvania enacted legislation, Act 44, which mandated that the city reach a funding level of at least 50% by Dec. 31, 2010. In the event the city failed to meet the minimum funding requirement, the city's plans would merge with the state's pension system, PMRS.

The city adopted its current plan to meet the funded requirement at the end of December 2010. The plan included the deposit of $45 million from the city's debt service fund to the comprehensive trust fund. It also calls for diverting dedicated parking tax totaling $13.4 million annually for 2011 through 2017 and $26.8 million from 2018 through 2041, in addition to making actuarially required contributions (ARCs). The timing of the increase in dedicated parking revenues corresponds to the decline in the city's debt service. In 2013, the city made its full ARC payment of $31.3 million and voluntary extra payments of $5 million from the general fund in addition to the $13.4 million of dedicated parking revenues, for a total of $49.6 million.

The dedication of parking tax is irrevocable per city council action and equaled 28% of total parking taxes budgeted for 2012. In June 2011, the Pittsburgh Parking Authority increased parking meter rates to produce additional revenues. Should parking revenues be insufficient, the city is still obligated to make these additional payments.

A revised actuarial report as of Jan. 1, 2011 that reflects the 2010 payments and the present value of all currently scheduled dedicated parking revenues through 2041 elevated the aggregate funding level to 62.4%, assuming an 8% investment return. Using Fitch's more conservative 7% discount rate, the updated funded level is 56.3%. Based on this revised valuation, it was deemed by the state in September 2011 that the city's plans were sufficiently funded and they were not merged with PMRS. Fitch notes that reflecting future payments is not a standard means of calculating a funded ratio, and that based on current assets in the plan, the funded ratio is notably lower. The city plans to release an updated actuarial report as of Jan. 1, 2013 in the near future. Though not run by the state system, the pension plan's policies are determined by the state, so the city is unable to re-negotiate eligibility requirements.

The city's other post-employment benefits (OPEB) on a pay-as-you-go basis make up a moderate portion of expenses at $20 million or 4% of expenses in 2012, which was 62% of the ARC. The city recently established an OPEB trust that now has $5 million in it, and eliminated OPEB benefits for those hired after 2004, which will limit obligations over the long term. Overall carrying costs for debt service, pensions and OPEB are an elevated 24.5% of government fund spending.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=814138

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